Problem banks on rise, but bank profits rising too

McClatchy NewspapersAugust 31, 2010 

WASHINGTON — The number of banks on a government "problem list" rose to 829 in the second quarter, the Federal Deposit Insurance Corp. said Tuesday, a sign that bank failures may surpass last year's 140 closures.

At the same time, however, banks overall reported strong income during the quarter, providing some grounds for optimism.

There've already been 118 bank closures this year through last Friday. The big number of problem banks — rising from 775 in the first quarter — suggests that more than 22 additional banks could fail before year's end, exceeding last year's tally.

The number of problem banks is the highest it's been since March 1993, when 928 banks were under close surveillance for possible failure.

However, FDIC Chairman Sheila Bair emphasized the bright side of the mixed message at a news conference. Citing rising earnings and strengthening credit quality, Bair said the outlook for banks was improving.

"This is the best quarterly profit for the banking sector in almost three years," Bair said. "These results provide more evidence that the sector is moving along the road to recovery. . . . The levels of noncurrent loans and charge-offs are beginning to trend downwards."

Banks and thrifts regulated by the FDIC reported an aggregate profit of $21.6 billion from April to June. That's a lot better than the $4.4 billion net loss these institutions recorded in the second quarter of last year. However, earnings remain below historical norms.

In another sign of modest improvement, only 20 percent of FDIC-regulated institutions reported losses in the second quarter, compared with 29 percent in the same period last year.

Although provisions for potential loan losses remain high at $40.3 billion during the quarter, that's down more than 40 percent from the same three months of 2009. Simply put, banks are having to sock away less to cover possible losses, so their quarterly earnings are improving.

The number of loans that were 90 days or more past due fell from April to June, the first time that's happened since the first three months of 2006. FDIC-insured banks and thrifts wrote off $49 billion in loans they couldn't collect in the second quarter of this year, considerably better than the $214 billion write-off in the same period last year.

The total of number of loans and leases declined 1.4 percent in the quarter, however, as did the total assets in banks, which fell 1 percent to $136.2 billion, the FDIC said.

"Particularly given economic uncertainties, we believe all banks should continue to exercise caution and maintain strong reserves," Bair said.

ON THE WEB

FDIC second-quarter report

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